NFC – Where art thou?

So, 2012 was supposed to be the year of NFC. We are now in Q4-2013 and NFC is nowhere to be seen (in the mobile payments space, that is).

NFC was supposed to become famous because of it’s perceived association with mobileNFC_Forum_N-Mark payments. Sadly, mobile payments has not yet taken off as anticipated and that means that NFC is still sitting on the terminal. NFC was billed to be one of the key foundational elements for mobile payments. It still is. But, why then is it still sitting there? Is NFC an impeding factor for mobile payments?

I don’t think so. NFC is a solid technology. It’s proven and it’s been tested. But for mobile payments to succeed using NFC at least 4 things need to happen.

First, we need mobile devices with integrated NFC capabilities. Second, we need POS terminals to be able to read NFC signals. And third, we need associated apps and software to stitch various elements together. Forth, NFC based security concerns need to be addressed. Let’s briefly explore each of these factors.

Mobile Devices – Very few mobile devices 4G LTE have integrated NFC in to their development. Samsung Galaxy S4, HTC one etc are a few devices that have NFC. The NFC roadmap on devices does not look very robust. From a device standpoint, I believe that the game will change should Apple decide to integrate NFC in to the next iPhone. The most recent iPhone has biometrics and iBeacon and Apple once again steered clear of NFC. Experts agree that NFC on an iPhone will be game changer and will give NFC based mobile payments the impetus that it so needs. In my mind, NFC based payments is a work of art that is looking for a rich benefactor. Well, not quite, but hopefully you get the point. But, going back to Apple, to me it seems very unlikely that they will embrace NFC anytime soon. Further, I don’t think any of the Android based guys can move the needle on this one as well.

POS Terminals – The POS terminal market is very fragmented. There are some key players though. NCR, IBM etc are industry heavy weights. NFC integration in to POS terminals will come at a cost. This cost will have to be paid by retailers. The retail business already operates on wafer thin margins and stores today are reluctant to place POS Terminaltheir bets are on NFC. Why should they? What will they gain with this integration? Customers (and the stores) are very comfortable with how to currently pay of their purchases. So, what can be the rationale that can be applied to enable retailers to move in this direction.  My sense is that that some stores (on the higher end, boutiques, coffee & pastry shops) will most probably be the first adopters of this technology.

NFC based Apps –  The ecosystem around the HW is equally important for an initiative of this sort to succeed. Personally, I don’t think this would be an issue, should NFC become mainstream. There are zillions of app developers out there who can churn out meaningful apps that would address this feature. More importantly, the launch of NFC based mobile payments will be accompanied by associated apps to enable NFC based payments at an end-user level.

Security – While this is an issue, I believe that this will be aggressively addressed by means of strong encryption and secure policies. 13.86MHz is a radio frequency that can be easily hacked in to. But this is signal is not a broadcast signal – it is a proximity based field. Hence, the attacker needs to be close to snarf this signal. The snarfed data will be garbled, unless the attacker has the key to decrypt the data. Furthermore, the attacker will need to hack in to data one customer at time. It’s a very remote scenario, since no attacker would sit by a store all day waiting for customers to show up. I am sure that they would rather be more inclined to spend their time trying to go after volumes of more valuable data as opposed to a proverbial trickle.

Perhaps the most important factor is the customer. Why would they use the mobile phone to pay for groceries, when, the current modes of payments work very well? This is a classic case of competing against non-consumption. Customers are tuned to paying by either cash or card. And now, there is an attempt to add a third element to this mix. This will be one tough sell to the mass market. As in every technology, if NFC based payments does come to fruition, the early adopters will be the initial market. My sense is that this will one of those things that will take a long time to percolate to the mass market.

The weird thing about this is that the early adopter market is a well heeled and what NFC based mobile payments would do is simply transfer their mode of payment to their mobile phone in the best case. Yeah sure, they may spend a few more incremental dollars but would it be enough for all the players in this business to justify the investment. In the short run, maybe not, but in the long run, yes. That because, I believe that the real target market for NFC based payments (or any mobile payment schema) is the cash-market. I have said this before as well. If the players in this business (payment processors, carriers, credit card companies, device manufacturers etc) can get a piece of that pie, then everyone would be happy.

Anywho, NFC based mobile payments is sitting still at least for now in the US. Mobile phones are being used for payments other unique ways, especially in the developing world. Case in point is M-Pesa.

That said, who is going to give NFC the nudge it needs? You?

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